By Andebo Pax Pascal and Judith Nguli, Jesuit Justice and Ecology Network Africa (JENA).
At the beginning of October 2021, the International Consortium of Investigative Journalists (ICIJ) released the Pandora Papers document, implicating 14 offshore professional service providers, politicians, public officials and celebrities who utilise the offshore system to hide the true value of their wealth, and in some cases pay less tax. This comes exactly four years after the unprecedented leak of the Panama Papers of 2016. Of particular interest for Africa, the Pandora Papers document implicates nearly 50 politicians and public officials from 18 African countries. Among them are Presidents Uhuru Kenyatta of Kenya, Denis Sassou Nguesso of the Republic of the Congo, and Ali Bongo Ondimba of Gabon. Other high ranking politicians are Patrick Achi, Prime Minister of the Ivory Coast; Jim Muhwezi, security minister of Uganda; and Aires Ali, former Prime Minister of Mozambique, among others. It is also important to note that the combined wealth of these African prominent persons in offshore entities is valued in billions of Dollars.
The Pandora Papers have been received with mixed reactions, ranging from denial of the authenticity of the information, to the denial of wrongdoing, and also the affirmation that the leaks could promote transparency, lift the veil of secrecy on the wealth of public servants, and help to investigate those implicated. Consequently, this has led to a spate of new reform efforts, on the one hand, and also drew pushback from several governments and their allies, on the other. This article reviews the Pandora Papers revelations in relation to Africa only, to assess the gravity of their implications for her countries. This is because according to Professor Ricardo Soares de Oliveira, of Oxford University: “The continent endures all the ills of the global offshore economy without enjoying the dubious benefits others have derived from it”. The secret offshore assets span a complex network of secret companies, which offer a safe avenue to move around money from genuine earnings, political corruption, illicit arms dealings, drugs, and other vices, to eventually clean the money.
This analysis is not an indictment against wealth creation by any individual. Earning genuine private wealth is not a crime. Keeping one’s wealth safe is not a crime either. But those who have great wealth have obligations towards society, as very often rely on other persons and sometimes the resources of the common good to generate and manage their wealth. For the leaders who often pledge to serve their people, these obligations are even more pronounced. Thus realising that the leaders lead in hiding wealth reneges on their commitment and betrays their intentions. Besides, using secrecy jurisdictions to keep wealth has a number of implications on the home economies, and this paper attempts to highlight these facts.
What the Use of Offshore Jurisdictions by Africans Means for her Countries
1. African countries are generally cash strapped and yet the Pandora Papers reveal that a number of African leaders are contributing to this problem by keeping part of the wealth that should have been invested within in offshore jurisdictions, majority of which are outside the continent. The lack of revenue has prevented the African countries from making the necessary investments that can have multiplier effects – in terms of employment, incomes and tax. Ironically, this happens when Africa has continued revealing more and more of its potentials to expose opportunities for investment. Again, the past decades have exhibited two stunning paradoxes in the African economies: growth acceleration coexisting with stubbornly high poverty rates; increasing capital flight along with widening development financing gaps. The perpetrators of the capital flight are multinational corporations aided by African allies. This has led to depleting domestic savings, and has kept many African countries below their domestic investment potential and therefore has retarded economic growth in the continent.
The UNCTAD 2020 Africa report highlights an annual capital flight from Africa of $88.6 billion, equivalent to 3.7 % of Africa’s GDP, which outstrips Official Development Assistance (ODA) inflows amounting to $48 billion or foreign direct investment (FDI) amounting to $54 billion. This is depriving governments of revenue that is needed for inclusive and sustainable development. Curbing this annual capital flight of US$88.6 billion from Africa could bridge half of the continent’s $200 billion financing gap of the SDGs, lifting millions of people out of poverty, creating job opportunities for the burgeoning youthful population, and providing access to quality education and health care. It could also generate revenue now needed to finance COVID-19 induced recovery efforts and climate change mitigation and adaptation. The implications of capital flight for the inequality-growth-poverty nexus are therefore a high stake and carry substantially heavier costs for the source economies in Africa in terms of forgone economic development opportunities.
African countries are considered to account for a small share of global unrecorded ‘missing private wealth’. However, the estimates of capital flight as per the available literature constitute only a subset of Africa’s ‘missing wealth’. Constraints of lack of a consistent methodology and appropriate data affect the accuracy of estimates of Africa’s ‘missing wealth’. The fact that Africa is now fully integrated in the global offshore economy has grave negative consequences for African development as the continent’s much-needed capital leaks, usually without proper records. The benefits arising from the accumulation of private wealth in safe havens accrue to the MNCs operating in, and the few political and economic elites of African countries. The beneficiaries “have no interest in putting an end to poverty in Africa. This trend deepens income inequality and poverty, while the middle class and the poor incur higher direct costs for social services such as education and health care.
2. As hinted earlier, the offshore system also leads to revenue loss due to tax evasion. Tax havens also provide a legitimate avenue to the actors to hide legally escape tax obligations in their home countries, while the offshore jurisdictions tend to resist exposing the wealth of their esteemed clients. In a year, African countries are estimated to lose about $500 billion and $600 billion on corporate tax losses via tax havens. This results into tilting the burden of taxation in the African countries to persons with lower incomes to cover the fiscal deficits, as they do not have the luxury of dodging the taxes they are supposed to pay. This limits the tax base and further curtails the government’s ability to invest productive infrastructures and provide public goods and services. For instance, Kenya’s tax revenue loss in 2018 due to tax evasion and illicit financial flows was estimated to an average of KSh. 40 billion. To put this figure into perspective, the amount cheated out of Kenyan economy is higher than national budgetary allocation for social protection for the 53.77 million Kenyans. Interestingly, tax evasion seems a secondary motive as the rich and powerful in many African countries generally risk paying little tax, anyway. It is rather the desire for secrecy, asset protection and immunity from potential criminal investigations that these prominent persons seek.
3. The issue of Africans hiding resources in offshore accounts is also linked to leadership in the African countries. Many of the leaders in the African countries exhibit lack of ideology, unstable policies and either deliberately or inadvertently establish weak institutions, including those for governing the revenues and resources of their countries. Consequently, many leaders have done little to improve the welfare of their people, who are very poor, while a number of the leaders, and their cronies, live in opulence. This has created a lack of trust in most African leaders. This could partly be attributed to the fact that African leaders have frequently come to their position with limited experience. They also carry with them the aspirations of financiers and godfathers whose aim is to capture the process of leadership selection for ulterior motives without regard for competence and internal democracy. Hence, there is decline in morals and discipline due to bad policies, eroded professional standards and ethics and weakened system of governance. Corruption is on the increase, party financing is opaque, and regulations on financial disclosure are either non-existent or ineffective. Politics in Africa is synonymous with wealth, whether acquired legally or otherwise. This allows wealthy individuals, known as godfathers, to wield significant influence, mainly for their own benefit but to the detriment of the state. There is also a high chance that leaders who act against the interests of their party establishment, financiers and godfathers, even for the benefit of the state, will not last long.
Additionally, Africa’s economies have political and economic systems that are extractive and mainly used by those in power. Even foreign aid, when channeled through such extractive systems, almost never reaches the most vulnerable in society. This is worsened by the fact that the global system has little interest in developing the African economies but is more interested in extracting from them. Hence, the scramble for power is usually intense and sometimes dangerous, due to the interest to access public resources. It is almost right to argue that a good portion of the wealth the politicians and prominent Africans hide in the offshore jurisdictions is ill gotten, looted from the public coffers and valuable resources of the common good of the African countries. Modern-day plunder of African resources operates along a sophisticated criminal enterprise value chain, aided by the ‘paradises” called tax havens aided by the international financial system. Seemingly formal systems like the banks, law firms, accounting firms, audit firms, and other deal makers all contribute to facilitate the loot of Africa’s resources. Hence, financial crime is separated from the criminals and impunity prevails.
4. Furthemore, the existence of the safe havens insulates Africa’s leaders and wealthy to have little commitment for establishing stable and functional systems. The systems established only favour and reinforce policies that protect the interests of the political and economic elite. Each successive leak drives home the same message: Those in leadership will never serve their people and the rule of law will not be applied equally to all. That African leaders are using the parallel and opaque global financial system to drain wealth from their often unstable and economically suffering countries is testimony that they are not willing to establish the systems that should work effectively to develop their countries. Consequently the checks and balances they establish are weak.
5. Similarly, when African leaders are using the offshore havens, it also demonstrates that they are not genuinely committed to fight to eradicate such an unjust global system that deprives African countries of the needed resources. The system works well for the African leaders, and they have no recourse to stir the waters. Ironically, there are indications that governments outside Africa seem to take the efforts to fight against corruption and illicit resource outflows from Africa more seriously than the African leaders. One wonders if this is simply due to lack of capacity or lack of commitment from the leaders. The latter is more likely since many of the culprit companies (MNCs) and individuals have allies in the persons of African leaders and politicians. As such, when President Uhuru says that the Pandora Papers revelations will pave way for more financial transparency, it sounds cynical.
Need for Action to Improve the Situation
Africa is bleeding financially, unfortunately also from the actions of her own sons and daughters. However, to continue to lament about the problem is to follow the same pattern of throwing the hands in air in desperation. The Pandora Papers document and others before it call for action from all well-meaning individuals and groups for an African Renaissance, intended to: close loopholes for resource leakage, enforce the appropriate regulations, recover resources and assets lost and ensure that the right atmosphere is established through institution and policy building to promote investments within. This implies:
- Deliberate improvements and strategies to strengthen the human and technical capabilities and effectiveness of specialised national institutions such as customs services, financial intelligence units, and anti-corruption agencies, to detect fraud, embezzlement of public resources, illicit financial transactions, and trade misinvoicing, and to increase penalties for financial crimes so that these are not lucrative.
- Macroeconomic policies aimed at reducing interest rates to stem capital flight (Fofack and Ndikumana 2015). Africa needs strong rules and institutions that keep private and public sector corruption in check. At the national level, African governments must also establish strong legal frameworks on transparent and accountable management of natural resources aiding the extractive industries, tax payments by corporations, as well as open legal proceedings of prosecutions of economic crimes. The African public has the right to know about the revenue generated from the use of the resources of the common good. This will empower the people to hold their governments accountable.
- The need to deliberately sanitise the process of selecting leaders to ensure that those elected must fully comprehend their responsibilities, duties and obligation because the long term salvation of developing countries depends on the quality of its future leaders who must have empathy for the people.
- Deliberate use the great opportunity presented by Africa’s large youth population to influence the emergence of a new generation of leaders who are more committed to the causes in their countries. The leadership development process in the African countries should be democratised using the available learning institutions and processes of knowledge development and dissemination.
- Building support at national and global levels for policies against capital flight. The conversation on capital flight should be shifted from being an African or developing countries’ problem to being a global problem. It is important to emphasise that the gains from stemming capital flight and improving international financial transparency will be shared by all globally. Concerted action by all the stakeholders of good will; in the academia, civil society, religious groups, ordinary citizens, is thus needed to advocate for policies against capital flight.
- Value systems that emphasise the importance of the human persons and their dignity should underlie all policies and decision-making. In the African states, this should be bolstered by a sense of patriotism that goes beyond ethnic boundaries. All the stakeholders should be involved in reshaping the vision of their countries to ensure that the aspirations of all the citizens are taken into consideration. This will influence the policies and development strategies, and the allocation and use of public resources for common desirable development priorities.